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The Bank of England expected that Britain's low levels of unemployment would sooner or later see wages begin to increase and feed through into rising prices.
However, the UK labour market appeared to defy gravity, continuing to tighten without any significant effect on wages. The central bank currently believes it can see hard data that wages are rising and that interest rates will need to move faster than initially expected.
Wage growth fell behind inflation in 2017, despite unemployment dropping to a 42-year low of 4.3 percent.
However, the last official wage data showed that the gap narrowing as the annualised rate of growth of pay increased to almost three percent in the second half of 2017.
Employers expect pay settlements to average 3.1 percent this year, compared with 2.6 percent the previous year.
The sharp rise in inflation last year is thought by the bank to have been mostly propelled by the depreciation of sterling, which raised the cost of imported goods, and increasing global oil prices.
According to BoE Governor Mark Carney, the “most important decisions by orders of magnitude that will be taken will affect UK households' and businesses' likely prospects in the years to come”, and it would be those taken as part of Brexit talks rather than by the Monetary Policy Committee.
But despite Brexit uncertainties, the BoE is now increasingly confident that pay growth is already accelerating in a tight labour market with low unemployment.
The bank has just carried out its annual detailed assessment of the UK's capacity to produce output. On the basis of this, the MPC concluded that there was no reason to improve its forecasts for the future sustainable rate of output growth. There was, it said, no reason yet to think that productivity growth was recovering faster than expected.
